Loonie nudges towards parity

Canadian dollar hits 3-month high against U.S. dollar as economic data improves

Despite widespread market sentiment that the Canadian dollar is overvalued and overdue for a fall, the loonie continues to move higher against its U.S. counterpart and is within spitting distance of returning to parity.
(Fred Greenslade/Reuters)

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Despite widespread market sentiment that the Canadian dollar is overvalued and overdue for a fall, the loonie continues to move higher against its U.S. counterpart and is within spitting distance of returning to parity.

At the close of trading Tuesday, the dollar was up 0.24 cents to 99.56 cents US. That’s the highest it has traded at since Feb. 14, according to Bank of Canada data.

The latest jump came after the Reserve Bank of Australia cut its benchmark lending rate to a record low. The Canadian dollar rose to a seven-month high against the Australian currency on the news.

Monday’s better-than-expected report on Canadian building permit values also helped to boost the loonie.

Scotiabank Global Banking and Markets currency analyst Camilla Sutton notes that the Canadian dollar has risen 2.1 per cent in just the last two weeks as domestic economic data have "improved materially."

'In the near-term, the momentum is for further CAD strength.'—Scotiabank currency analyst Camilla Sutton

In addition to higher building permit numbers, she cites better than expected retail sales, GDP, industrial production and international merchandise trade figures as being supportive for the Canadian dollar (CAD).

"The USD has been broadly lower in this time period as the [Federal Reserve] has turned more dovish, pushing out market expectations of the ability for the Fed to taper [quantitative easing] into 2014," she said in remarks emailed to CBC News.

Figures from the U.S. Commodity Futures Trading Commission in late April showed that investors were betting against the Canadian dollar in record numbers as the number of people holding short positions against the loonie hit an all-time high of $7.4 billion US.

"There was a large net short CAD position that had been built to an extreme and we are likely seeing much of this unwound, accelerating CAD strength," Sutton added.

Many analysts expect the loonie to fall dramatically over the longer term. For instance, TD Bank chief economist Craig Alexander told CBC News last month that he could see the loonie drop to the range of 90 to 92 cents US over the next couple of years.

In March RBC economists forecast that the loonie would average 96 cents US this year.

Sutton’s view is that the loonie will likely "struggle to move sustainably or substantially away from parity" over the next six months to a year. "However in the near-term, momentum is for further CAD strength."